Heartland Bank's lending growth spurs 7% profit growth hampered by rising bad debts

Heartland suffered "teething problems" with its new banking system.

Heartland Bank [NZX:HBL] says increased lending and currency gains helped boost its first-half net profit 7% but the increase was also dragged down by a 51% jump in charges for bad debts.

The bank’s net profit for the six months ended December rose to $31.1 million from $29.1 million in the same six months a year earlier.

Charges against profit for bad loans rose to $10.4 million from $6.9 million in the same six months a year earlier. If bad debt charges had not increased, the net profit growth would have been 19%.

Heartland attributed that growth in bad loans to both its lending growth and the underlying impairment rate of its motor vehicle book “due to an intentional adjustment to risk settings in previous years, which has resulted in a gradual but expected increase in impairment levels.”

Impairment levels were also hit by operational issues experienced immediately after the introduction of Heartland’s new core banking system, which led to an increase in arrears.

“These issues have since been addressed and it is expected arrears levels will reduce in the second half of the financial year."

The year-earlier impairment charge was also reduced by a $1.2 million insurance recovery, exaggerating the period-on-period comparision.

The bank’s costs rose 12% to $40.2 million, partly reflecting depreciation of the new system and additional spending related to implementing this system which Heartland calls “teething issues.”

Net impaired and past due loans of more than 90 days rose by $6.2 million to $44.5 million from June 30 last year.

Heartland says it is focusing on using technology and partnerships with other intermediaries to help it to reach more customers.

Lending trends
Heartland says its reverse mortgage lending rose $82.4 million, motor vehicle lending grew $62 million and personal loans, including Harmoney, rose by $24.8 million.

Net lending through its business and rural divisions grew by $46 million and $1.2 million respectively.

Net operating income from the bank’s consumer division rose just 4%, with the bank saying strong lending growth of 19%, or $1 billion, didn’t translate into a commensurate increase in profits “due to a large proportion of the new business coming from lower risk, lower margin loans.”

It says the 26% growth in net operating income from reverse mortgages to $3.7 million reflects particularly strong growth in Australia.

Net operating income from Heartland’s business division rose 14% to $26.3 million as the bank focused on the small business market, “extending our reach through intermediaries and Heartland’s Open for Business online origination platform,” which grew 45%.

The rural division’s net operating income rose 17% to $16.3 million, also driven by lending growth.

Heartland says funding and liquidity remain strong, with retail deposits rising an annualised 10% to $2.7 billion.

“The market continues to respond well to Heartland’s term deposit and call account offerings, which give customers competitive interest rates and unlimited on-call access to their money.”

The bank raised $150 million from a five-year unsecured, unsubordinated medium-term note offer in September last year and $59 million from a rights issue in December.

Heartland had previously been criticised for its previous capital raising in which it raised $40 million through a placement to institutions and a retail share purchase offer that led to retail investors receiving less than one in every three shares they sought because of oversubscriptions.

Heartland will pay a first-half dividend of 3.5c per share, the same as last year.

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